Huge Potential Here For Sodastream International Ltd (SODA)

With all the recent news regarding the potential buyout of Sodastream International Ltd (NASDAQ:SODA) by the beverage industry giants PepsiCo, Inc. (NYSE:PEP) or The Coca-Cola Company (NYSE:KO), one needs to keep an eye on whether or not that is even desirable. The home beverage machine maker still has tremendous growth left in the Americas, where soda consumption per-capita leads the world and greatly exceeds its home base of Western Europe.

Sodastream International Ltd (NASDAQ:SODA)’s stock has surged from a low of $35 last November to a recent price exceeding $70, leading some investors to question if the move is overdone.

Americas opportunity

The opportunities in the Americas are vast, as countries like the US, Brazil, and Mexico leads the world in soda consumption. Sodastream International Ltd (NASDAQ:SODA) still lacks household penetration of greater than 1% in any of these countries, whereas some established European countries such as Sweden have reached 25%. While the Europeans desire the home soda makers for environmental and aesthetic reasons that might not be matched on this side of the world, the actual demand for the syrups should exceed the limited amount drank in those countries.

The US is the largest soda market in the world, and the company only has a 1.1% household penetration rate there. Canada had a 1% household penetration and 70% year-over-year growth. Mexico has the highest per-capita soda consumption in the world, yet the company has no sales in that country. The plans are to establish a subsidiary and begin sales in early 2014. Brazil is the third largest soda market in the world with a 57 million household potential.

Americas revenue hit $48.3 million in Q1 2013 and already compares favorably to the $53.3 million from Western Europe. The impressive part is that the company has yet to fully build out any of the Americas markets with years of growth left. Another good note is that the growth rate of the established European markets is a strong 17%.

Deal rumors

Last week rumors were flying that PepsiCo, Inc. (NYSE:PEP) would purchase Sodastream International Ltd (NASDAQ:SODA) in a deal valued up to $2 billion, or $95 per share. Plenty of reasons exist as to why that rumor might be flawed, especially considering that PepsiCo flat out denied it. In reality, it could be The Coca-Cola Company (NYSE:KO) that is working on a deal, or either beverage giant might be working towards a partnership instead. Typically these rumors have a solid reason for coming to light whether all the details are accurate or not. Neither company can deny the weakness in the core soda markets nor the advantages ownership of the premier machine maker could provide the buyer over the other company.

Neither Coca-Cola nor PepsiCo, Inc. (NYSE:PEP) can afford for Sodastream International Ltd (NASDAQ:SODA) to become a household name in the Americas. Right now, analysts only expect Coca-Cola to grow revenue 1.1% this year, and PepsiCo, Inc. (NYSE:PEP) isn’t expected to do much better at 3.4%, and that’s with growth from emerging markets and Frito Lays brands producing the higher numbers. The major drawbacks for the behemoths would be that a home beverage maker would compete directly with the existing business line that is highly profitable. Conversely, neither can let the other company control that business line. Some revenue is better than none.

The deal, while attractive with the stock trading at around $70, shouldn’t be seen as the ideal option for SodaStream investors. The company has guided towards non-GAPP earnings that could easily reach $3 in 2013 and jump to $4 in 2014. At that level, $95 by the end of 2013 doesn’t appear to be an aggressive estimate.